Housing after Debt?
This month Archinect looks closer at our housing economy — how we commission and produce homes in today’s financial climate. This year a primary index tracking residential real estate value in major US cities revealed American house prices are now rising at a rate of 5.9% per annum — a three year high — significantly outpacing relative income gains. This growth now more than doubles the hourly earnings of the average American, pricing many families out of the market and out of the city. Similar trends can be found across major metropolitan areas in Europe and Asia, fuelling acute housing crises such as the well documented situation in London, England. I speak to designer and civic entrepreneur Alastair Parvin of London-based studio Architecture 00 who, frustrated by a select number of poor quality homes for sale at sensational prices, is now actively looking for ways to reshape the market itself; starting by rethinking the business model.
What first drew my attention to this issue was a diagram in a Medium thinkpiece by Alastair Parvin on housing and debt. The graphic broke down the sale price of a typical new build home, valued at £250k (around $330,000), to figure out on what each portion of money was spent. To my surprise, only 32% of the overall figure went to the actual construction cost, the same price as the land beneath it. The second largest expense was a £40k ($53,000) developer profit, dwarfing the other categories such as site infrastructure and local authority contributions. The article then put forward that when the interest is applied on a mortgage of £212k ($282,000) paid at 4% over a 25 year period, there would be additional shadow costs of £125k ($166,000) on top of the original house price.
In his example, the debt incurred due to associated costs of the process by far outweigh the actual cost to construct the house by over 300%. One of the conclusions Parvin drew from this was that it was therefore not exaggerated construction costs that were preventing access to housing, but instead the spiralling ‘debt economy’ now engulfing the homebuilding industry. “[This situation] creates scarcity, and therefore inflation, therefore speculation, therefore monopoly and therefore further scarcity”, he warns. “We [architects] obviously need to understand it. Because housing is one of the basic platforms upon which our social and economic prosperity are built, but yet the systems we use to provide it are failing.”
Ballooning homebuyer debt goes a long way to explain why the relative cost of buying a home in an American city has more than doubled in a generation. Combined with a lack of affordable homes being built, and the rise of nonprimary urban residences lying empty in major cities such as New York, today’s average homebuyer is now faced with few options other than to take on insurmountable levels of debt. The 2008 global financial crisis, whose origins can be traced back to subprime mortgages and systematic failings in the financial service industry, has done little to slow continuous inflation of housing markets in major global economies. Back in 2008, I remember reading numerous commentary pieces warning that the economic crisis had exposed a housing market dangerously interlinked with a turbulent economy, one still in its infancy in how to cope with the risk of globally interconnected systems. Not much seems to have changed. In the article, Parvin argues that the opposite has happened — that the economy has instead tightened its hold on the property market to become the main driver of where and how homes are built, which comes at a cost. Could there be other ways of structuring our housing economy to make it more equitable?
When I call Alastair Parvin, he is crossing London on the bus during his morning commute to the office, destination announcements chiming faintly in the background. “The UK experience is an interesting case in point”, he suggests, “as it provides an exaggerated example of many of the trends affecting America and elsewhere — magnified by a history of land speculation and a select number of powerful developers”. It is important to note at this point we are speaking only of urban areas in the UK (as they now have more in common with each other and US cities, economically and politically, than the hinterlands which surround them). Parvin suggests this has created parallel housing economies: while speculative real estate bubbles swell in the city, many real estate tycoons will refuse to take on business outside its boundaries.
“Our Western economy is driven on an idea of debt, which keeps sections of society who may not have assets to become locked into paying that off”, Parvin continues, “when you look at the so-called growth during the 1990s up to today, the majority has come from two sectors, the property sector and financial services. We have invented money as debt, bought it in to inflated property and counted it as growth, while the actual economic growth which underlied that was pretty negligible. That has been distributed by making people feel that their house has gone up in value, despite real wages growing very little, or even dropping due to inflation. In the UK, we have tried to tax this as urban regeneration, and used some of the profits to make a funny shaped art gallery, the so-called ‘Bilbao effect’. We allow this creation of debt to inflate the value of the land beneath our feet, ironically, killing our real economy.”
“When you look at the so-called growth during the 1990s up to today, the majority has come from two sectors, the property sector and financial services. We have invented money as debt, bought it in to inflated property and counted it as growth, when the actual economic growth which underlied that was pretty negligible.” Alastair Parvin
Has the 21st century house become a vehicle for its mortgage? I suggest to Parvin that this debt-driven model seems to show worrying signs of short-termist thinking and even to be self-limiting in the long run, to which he agreed. “Day to day people have less money to spend in the real economy, and they are also having to commute further, increasing costs of living. The current model also drives down the quality of homes so people have to spend more on energy bills”, he adds. “There is a real economy, people making and doing things, and it is ironically being suffocated by this debt economy”.
I expect most architects reading this will be familiar with the case of the developer who wishes to spend less on a domestic project through speeding up and decreasing the quality of construction materials. Due to the financial risks involved in homebuilding, many residential projects in the past 30 years have been outsourced to the private sector, to developers pushing the economic bottom line in order to hit specific profit margins. In any case, the construction of the building itself seems to be increasingly irrelevant in a project management process just as interested in generating profit from inflated land value as from the building upon it. Plots and properties often remain empty, or stand as temporary car parks, until a spike in land prices encouraging resale — architectural value in such a housing economy is at best a luxury add-on.
“The capital we work for is not intelligent capital”, Parvin argues, “in the case of home building, this is epitomised in the ‘current trader model’ — where the developer’s main aim is to sell the land for more than they bought it for”. When this outlook drives the home building industry, it is perhaps no wonder that it filters into architects’ design briefs. As an architect working with homes, albeit on a small scale, I too have found myself selling my input in the design process as an increase of property value when the house is to be sold. This is a frustrating place to be put in when you are concerned with how spaces shape people’s experiences and livelihood. “An example I always use is the insulation in the walls”, Alistair continues, “in this developer model, insulation is just seen as an extra cost, so they [developers] try and minimise it as low as the regulations will allow them to, as they are not the ones paying the heating bills. As soon as someone is taking a 20, or 30 year view on housing, putting more insulation in becomes an investment which pays back many times over the life of the building.”
Parvin, alongside his colleague Indy Johar, co-founder of Architecture 00, are now directing their frustration into researching links between the construction industry and the creation and inflation of assets, with the aim to suggest alternatives to business as usual. Through their writing, outreach and dialogue with city planners and housing developers, they consider that by adjusting the business model of the housing economy, a smarter way of investing could be unlocked. This would subsequently bring to light hidden long-term costs which are not shown in the present for-sale price, such as heating bills, or other expenses necessary to create safe and healthy neighborhoods. “The moment we can disintermediate this short-term speculative model”, Parvin suggests, “is the moment we can decrease the separation from the person who builds the thing to the end user. You get a profoundly different housing economy emerging, one where we can actually invest in the long-term performance of places.”
“That is what I, and many other architects have found themselves doing, moving away from the design to thinking about the economic models in which our buildings are created as we all got fed up. We didn’t really understand the business models of the people for which we were working.” Alastair Parvin
“Architects can’t just sit back and moan — we are the ones who have to build that equality, to find a way to change the investment model,” continues Parvin as he jumps off at the bus stop. “That is what I, and many other architects have found themselves doing, moving away from the design into thinking about the economic models in which our buildings are created, as we all got fed up. We didn’t really understand the business models of the people for which we were working. Then you become more engaged and think, how can we redesign that business model? And that actually has a bigger impact on changing the output.”
I ask Parvin why this business model has not already been redesigned, as it appears many aspects of the current housing economy do not make financial sense even in the mid-term. Why have business models that sideline affordability and economic stability been sidelined in favor of developer interests? What arguments do CEO’s, developers and politicians put back at him when he brings up these issues with them? Parvin admits the most frustrating thing is that for the most part, industry shapers agree, yet there inertia to react due to incumbency in policy-making, and risk to short-term profit for the development companies. He suggests it’s the ‘too damn difficult problem’ rearing its head — echoing Rittel and Webber’s ‘wicked problem theory’ developed at the University of California, Berkeley, in relation to the inevitable complexity of social policy issues. They suggested back in 1972 that in urban development, a purely scientific-engineering approach could not be applied due to a lack of a clear problem definition and differing perspectives of stakeholders. An additional complexity in the domestic market is that small homebuilding projects must pay the same overheads as larger developments, favouring large corporations over smaller developers. For these reasons, Parvin suggests it is time for architects and designers to take a more active role in shaping the future homebuilding industry.
“The moment we can disintermediate this short-term speculative model, is the moment we can decrease the separation from the person who builds the thing to the end user. You get a profoundly different housing economy emerging, which is one where we can actually invest in the long-term performance of places.” Alastair Parvin
Instead of viewing these issues as a threat, or a weighty addition to an already hectic schedule, Parvin stressed the unmissable opportunity for the design industry to reform our own market, a market which will remake itself at an insatiable rate whether we choose to intervene or not. It could be a task for architects excel in — we are after all trained to spot what’s not right about a design and attempt to improve it, to navigate complex and interdependent variables. This challenge demands a new type of systemic thinking, navigating the technical, financial and social aspects. Given the current rate of urbanization and home building both in the US and across the world, decisions we make as an industry today have an immediate impact. “We are completely underperforming,” argues Parvin, “Our impact is so limited by these bad, unscalable, unsustainable and economically unviable debt-based house building models.”
We then went on to discuss three aspects architects can work at to change the business model today — what could be called intervening in the ‘land space’, the ‘digital space’ and in digitizing government. In altering the ‘land space’, the idea is to adjust the concept of land from an inflating speculative asset from which to extract rent, back into buildable plot. The site might then re-emerge as a ‘platform for the economy’. Parvin suggests this would mean changing the way we approach land value, which he argues is currently stifling economic productivity. To achieve this, he recommends macro-political strategies (such as land value tax, explored in more depth in his joint article with analyst Andy Reeve, ‘Scaling the Citizen Sector’). This approach is now filtering into mainstream political discourse both in the UK and elsewhere in Europe, especially in the Netherlands.
“Homeowners are who architects want to be working for. For the people who love good design, the people who are going to live there and use it. Architects hate working for the speculative developers who are always telling them to make the ceilings lower.” Alastair Parvin
A number of thinkers are now experimenting with affordable ways to produce housing to be lived in, including award winning design studio Elemental’s ‘Half a House’ project and a some local authorities in the Netherlands, aiming to generate an alternative housing economy. Instead of racing to sell their land assets to developers, these Dutch local authorities are splitting designated land into smaller service- and home- orientated plots, over which a rules-based design code is layered. The plots are then sold on directly to homeowners, for around €50 — €100,000 ($59 — $118,000). As citizen you can go to a ‘plot shop’ to lease or buy one of the plots, then employ an architect, or select a custom designed home from an online store.
Rather than the developer capturing the uplift in land value as profit once the planning permission is passed, the increase in value is instead reinvested back into the community, such as into sewers, facilities for the elderly, or other urban infrastructure. In this scenario, architecture firms would compete to deliver the best quality long-term affordable homes for their clients — the homeowners themselves. If design firms were to work for the homeowner rather than a development company, one might imagine a radically different architecture developing. “Homeowners are who architects want to be working for”, suggests Parvin, “for the people who love good design, the people who are going to live there and use it. Architects hate working for the speculative developers who are always telling them to make the ceilings lower.”
The ‘digital space’ is an interesting realm as that is where the focus shifts to methods of procurement, design and fabrication — the more traditional tasks of the architect. At work we now rely extensively on digital tools, which increasingly take the form of whole-project interfaces such as BIM. These tools can enable us to analyze, predict the consequences of, and improve upon design decisions. On the other hand, they can also lead us to repeat the same design mistakes and overly rely on a component-based tendering process. Improvements in data gathering are also enabling the design professions to verify and support the decisions we make, perhaps soon giving us the ability prove with increased accuracy the economic idiocy of the insulation example as we will be able to weigh it against build-life costs within our software.
It is important not to forget that the digital space — automation, open source and digital fabrication technologies included — is shaped by the ambitions of its creators, conversations from which for the most part designers are excluded, or seemingly uninterested in. “Basically we have taken the existing industry and given it computers, but digitization is about fundamentally changing the shape of the industry”, argues Parvin. “Automation is not going to make us all unemployed, but there are simply some jobs which are not going to exist in the future. One of those is quantity surveying. There is just no such thing as a quantity surveyor in the future. So if you’re making a tool then inviting the quantity surveyor to it, it’s not a tool, you’re not doing anything.”
“Basically we have taken the existing industry and given it computers, but digitization is about fundamentally changing the shape of the industry.” Alastair Parvin
“In contrast, to look around at the results of the digital revolution in other sectors,” he continues, “we have seen that in the past 10–20 years it has disrupted the information industry, the media industry, the journalism industry, now it’s hit the service economy, creating things like Uber, AirBnB.” In the examples he puts forward, the digital platforms, for the most part, seem to have achieved this by designing down marginal costs and unlocking the power of the many — the millions of individual transactions, outsourcing the profit-making middleman’ to an algorithm. One of the most remarkable aspects is that these industries have achieved unrecognizable shifts in the space of a number of years, not decades. “If you had gone back 10 years, if you’d have told any sensible business person that the world’s biggest hotel would be hundreds of thousands of individuals renting out their flats, they would have said, no it won’t, that’s too damn difficult,” he explains. By extension, perhaps the digital shift is not, therefore, a technical exercise in uploading the paper records but instead an opportunity to revise the nature of how things are done.
As I wrote in an earlier feature on the Architecture of AI, automation is here whether we like it or not, and the architecture profession needs adapt and shape it, otherwise it will be shaped by other industries and actors to serve their interests. “I think automation is going to be so valuable for the housing sector”, Parvin tells me. “But the conversation we need to be having is who owns the automation. Instead of waiting for a Silicon Valley company to do it, we need to be the ones setting what it can do to make a better system for designers to work within.” The sheer demand for new homes both in America (around 1.6 million housing units required over the next decade) and in the rapidly urbanizing global south, almost demands a considered application of automation for routine tasks.
“Imagine if BIM could perform automated costings, could make decisions that were more transparent, more adaptable and local”, suggests Parvin. “It could begin to break our dependence on bad contracting models and their implications, and therefore avoiding disasters such as Grenfell. Just like when Cedric Price asked ‘technology is the answer, but what was the question?’, architects of the future will be versed in knowing the question, not selling the same answer.”
The third action we discussed architects might take was to encourage a digitizing government, a project Architecture 00 are currently engaging with. The planning process in the UK as in the US, is an infamously opaque mechanism, unresponsive and reminiscent of another era. We spoke about a classic case: the domestic house extension. Local authorities receive thousands of applications for homeowners wishing to extend their properties each year, to which they must respond with an almost entirely manual process. Because this workload is almost impossible to handle, aspects of the task, therefore, must be outsourced to an industry of consultant middlemen, which hikes up the cost of the process meanwhile increasing its opacity. A future architect might instead upload a digital 3D model onto the planning portal, onto which a simple test could be run to check all dimensions obey regulations, freeing planners to assess aesthetic decisions and more holistic aspects of each extension project.
By pressing local authorities to automate, Parvin suggests architects could help shape a more transparent planning process divorced from a dependence on expensive intermediaries, and to a certain extent ‘open up’ the housing market. This led me to consider a citizen-led architecture commissioning process, for both housing plots and urban infrastructure, where citizens might cast a vote — or even crowdsource via cryptocurrency — funds for specific developments to gain permission in the city. Would this be a more democratic process?
“If we want to work for somebody else, it’s not just going to happen, we have to go out and reform the way our industry works to make it economically viable for us to do that,” Parvin suggests. It rings true — it makes little sense for architects to work for a housing economy in which local authorities sell off land under market value to developers and then say, ‘we need 20% back as affordable homes’. For the most part, this strategy tends to generate overpriced, poor quality and one-size-fits-all buildings, bought as an investment rather than to live in. Instead, a housing economy restructured towards the citizen sector may instead cultivate and redirect energy towards designing quality domestic buildings, in a multitude of forms, some yet to be imagined. When a new business model is activated alongside emerging methods of digital fabrication (see Wikihouse), what kind of future city could we create?
During my discussion with Parvin, a key question remained in my mind. Would there not be a cultural backlash, in the US as in the UK, to different models of home ownership and reinventing age-old processes of getting housing built? I could imagine such ideas as co-ownership local authorities working with citizens to design neighborhoods being successful in communally-minded societies such as Denmark, where I live, but how would people react to these ideas in the US or the UK? “People underestimate the extent to which culture is shaped by economics”, suggests Alistair, “people say that in the UK we have a pro-homeownership culture, and of course we do, as homes have been inflating in value for the past few years and rent has got such a bad deal. The impressionist art movement could only happen after the invention of tubed paint. Culture tends to follow economics, but of course they are in a reciprocal relationship with each other.”
Perhaps it is worth reconsidering what home ownership means. If it’s about the freedom to build, to adapt and to put down roots, a freedom from an economic extraction process, can you do any of these anyway in a developer-built New York condo? Or would it instead be wiser to leave the apartment in as close to pristine condition as possible, and not to take the financial risk that the property value might decrease as a result of a botched-up DIY job? Parvin puts this eloquently — “In the UK and America we have established that owning your own house is good, but not that a neighborhood should own itself. Why should neighborhoods be owned by developers? Can we instead envision the home as a platform for the economy?”
“Perhaps it is worth reconsidering what home ownership means. If it’s about the freedom to build, to adapt and to put down roots, a freedom from an economic extraction process, can you do any of these anyway in a developer-built New York condo?”
For further reading Alastair Parvin recommends ‘Housing by People: Towards Autonomy in Building Environments’ by John F. C. Turner.
This feature was written for Archinect. Read the original article here: https://archinect.com/features/article/150034317/housing-after-debt-a-discussion-with-alastair-parvin